Q&A

Back to Financial Results (FY3/2016)

Investor Meeting Presentation for 2Q FY 3/2016 held on November 5, 2015

Question and Answer

You initially projected an approximately 100 billion yen year on year increase in LED backlight sales totaling 252 billion yen. I believe that half of that increase was supposed to have come from the higher unit price for your new assemblies and the rest from growing shipments to Chinese and Korean smartphone manufacturers. What factors drove you to revise the last forecast, raising projected sales to 288 billion yen? Are they related to the unit price, market share, or changes related to your customers? Can you give us some idea of what has changed?

When we announced the initial forecast, we didn't know the exact prices of the assembly parts we were going to buy from external suppliers. That's why we made the latest revision to the sales forecast, which are mainly based on the differences between the estimated and actual purchase prices.

Did you lower or increase the forecast figures due to any factors other than the purchase prices for parts?

Some other figures, besides the parts purchase prices, were also lower than the original forecast figures due to the delay in ramping up production for a certain model.

Does that decrease reflect only the delay, or does it encompass the supply ratio or price factors as well?

I don't know exactly how much, percentage wise, our customers buy from us so I have no idea what the competition's share is. As far as I can tell from their sales figures, there doesn't seem to have been any major change in the supply ratio.

Did you make a downward revision to your projection in light of all factors, besides purchase prices of parts, including those related to Chinese smartphone manufacturers?

Yes. Demand from Chinese smartphone makers was lower and later than we expected, which is why our shipment volumes missed the mark.

You said depreciation and amortization costs for LED backlights would fall. What do you expect the figures for capital expenditures as well as depreciation and amortization costs will be like next year?

Right now we don't see there being the need for the kind of large capital investments we've been making.

How far do you expect depreciation and amortization costs to drop company-wide?

We expect to see a drop of at least several billion yen although it depends on how much we spend on capital investments next year.

Speaking of LED backlight strategies, we see capital expenditures begin to decline once the necessary investments have been made. Generally that happens in the latter half of the product cycle. While Minebea can harness its strengths, like mass production capability and cost advantage, to beat the competition, it can also look to boost sales by keeping ahead of the curve when it comes to changing LED backlight technology and growth of thinner products. What exactly are you going to do to stay ahead of the pack?

We will in a way have to harness all our strengths for the models to be released next year and the year after. In the first phase of competition we will leverage the advantage of the accelerated depreciation method to maintain a strong operating foundation. The next phase will be, like always, a match between LCD and OLED. OLED may seem like it's reigning but LCD will make a comeback. That's because the technology is advancing. Making thinner smartphones with a high-definition 4K resolution screen means making thinner LED devices and thinner LED backlights as well. I think the LED backlight for 4K resolution screens is still too thick. We'll start anew to make thinner LED backlights for 4K resolution screens using the mold technology as well as other technologies we have developed over the years. We'll stick at it until we overcome all these sorts of technological hurdles. There's no end to technology.

I'd like to know why there was a delay in ramping up the production of LED backlights for a certain model and how you resolved the problem. Also, while you said that it won't put you behind the competition, will you really be able to get sales back up in the third and fourth quarters?

When it comes to parts production, even if you make them per the required specifications, they may wind up being incompatible with other components once they are all put together. This can happen to LED backlights, bearings, or motors, and that's what caused the delay. Although our assemblies were not a perfect match at first, we worked to make them fit and fixed the problem. I don't know exactly how things are going with the competition but recent indication we've gotten from our customers are right on target and that tells me their end products are selling.

Are order volumes increasing because you repaired the assemblies to make them fit better?

It wasn't a repair. What we did was adjustment of the manufacturing process, etc. to deal with a problem.

One-time losses were posted during the first half due to the delay in launching LED backlight production, a quality problem at NHBB, etc. How badly did that impact your operating income?

It all took a toll on operating income in the first half, mostly in the second quarter. Operating income for machined components was about 1.5 billion yen lower than initially projected. Operating income for electronic devices and components was also about 1.5 billion yen short of the target despite gains from motors and measuring components which partially offset the losses.

You expect to see an approximate 10 billion yen increase in operating income for electronic devices and components in the second half compared with the first half. Is this due to the marginal profit gain that will accompany growing sales of LED backlights?

Yes, that will be a major factor. Plus we expect profitability from motors to rise and sales of measuring components to be better than projected.

You said operating income for September exceeded 7 billion yen. Looking at the operating income distribution for the third and fourth quarters, do you expect it to reach somewhere between 20 and 25 billion yen in the third quarter, as LED backlight sales pick up, and around 15 billion yen in the fourth quarter for a second half total of 38.6 billion yen?

We project that third quarter operating income will exceed 20 billion yen.

When I think of "incompatible" LED backlight parts, I imagine they are making noise. You must have produced some LED backlights ahead of schedule. Were the LED backlights produced ahead of schedule all fixed and ready for shipment by the end of September, or do they still need some fine-tuning?

We've already started shipping them. No additional costs for fine-tuning will be incurred.

I understand that Minebea's LED backlights were the only products that were approved by your customer up until late July, but in early August the competition suddenly started shipping its products as well. To make things worse, the competition's shipping volumes have increased, giving them the upper hand. You trailed behind because your counterparts encountered an unexpected compatibility problem once they started assembling a certain model and then turned to your competition for parts as a backup. Now you've solved this problem, gotten production back on track, and are now steadily supplying high quality products as initially planned. Is that right?

You seem to have pieced everything together correctly but I can't say for sure what's happening with the competition.

Can I assume that the portion you supply will increase in the third quarter?

Like I said before, since I don't know exactly how much the competition is delivering, I cannot tell you what the supply ratio is. Last year we were able to figure out that the competition had a problem making its products to the customer's specs, but this year the new competitor is actually producing them. It's really anybody's guess.

Given the fact that the adjustments figure for the second quarter was lower than the previous quarter, why do you expect it to increase by 5.6 billion yen in the second half?

These are head office expenses that include a number of small figures. While none of them are significant and worth noting, we reviewed and reduced some expense items in the second quarter.

Could you tell us what the internal ball bearing shipment volumes as well as the pivot assembly shipment volumes were for September and October along with their estimated shipment volumes for November?

Internal ball bearing shipment volume for September and October were 69 million units and 73 million units respectively and are estimated to reach 76 million units in November. Pivot assembly shipment volume for September and October totaled 30 million units and 27 million units respectively and are estimated to reach 28 million units in November.

The external ball bearing shipment volume for September stood at a record high of 163 million units. Are there any notable or new applications they are being used for?

Demand has been strong for applications like server fans, ATMs, and automobiles. Minebea bearings are also used for the majority of drones. It's not that there are any specific new applications. Ball bearings sales are just growing across the board.

How do you expect LED backlight sales to grow from September and October to November?

Sales totaled 33.0 billion yen in September and 36.5 billion yen in October and are expected to exceed 40.0 billion yen in November.

You must have installed special production equipment to make the new LED backlight assemblies. Are you considering the possibility that those assemblies may no longer be needed next year or is that a risk we need not worry about since you've shortened the depreciation period?

Right now we don't think there is much chance of that happening, but we're not going to throw away all of our older production lines just because we've developed new lines.

Can you give us a rundown of second quarter ball bearing sales by application as well as year-on-year growth rates?

The percentage ratios of ball bearing sales by application were 18% for automobile applications, 33% for aerospace applications, 4% for home appliance applications, 6% for office automation equipment applications, 4% for PC and peripheral applications, 17% for motor applications, and 19% for other applications. Sales grew year on year by 20% for automobile applications, 13% for aerospace applications, 27% for home appliance applications, 33% for office automation equipment applications, 52% for PC and peripheral applications, 16% for motor applications, and 13% for other applications.

Does joint development of thin LEDs involve drastically changing the manufacturing technologies you currently employ, like eliminating the use of injection molding for instance?

It requires making thinner and stronger LED chips. On top of that, we three companies must work together to incorporate optical film into LED backlights that will pave the way to the thinnest ever displays with ultra-high definition 4K resolution. Although we haven't made them yet, we are in an ongoing technological battle against OLED. While we don't know which technology will win out, we are not just sitting around waiting to see what happens. We are continually plugging away.

When will LED backlight shipments peak this fiscal year?

According to our current projection, they will peak in November and gradually taper off after that. However, there are some orders coming later, including those for Chinese smartphone manufacturers, etc.

Do you expect to incur temporary expenses in the second half like you did in the first half?

No.

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